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How Dark Money Groups Overwhelmed the IRS

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By Maya Miller, ProPublica

April 19, 2019

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In the past decade, people, companies and unions have dispensed more than $1 billion in dark money, according to the Center for Responsive Politics. The very definition of that phrase, to many critics, epitomizes the problem of shadowy political influence: Shielded by the cloak of anonymity, typically wealthy interests are permitted to pass limitless pools of cash through nonprofits to benefit candidates or political initiatives without contributing directly to campaigns.

Such spending is legal because of a massive loophole. Section 501(c)(4) of the U.S. tax code allows organizations to make independent expenditures on politics while concealing their donors’ names — as long as politics isn’t the organization’s “primary activity.” The Internal Revenue Service has the daunting task of trying to determine when nonprofits in that category, known colloquially as C4s, violate that vague standard.

But the IRS’ attempts to police this class of nonprofits have almost completely broken down, a ProPublica investigation reveals. Since 2015, thousands of complaints have streamed in — from citizens, public interest groups, IRS agents, government officials and more — that C4s are abusing the rules. But the agency has not stripped a single organization of its tax-exempt status for breaking spending rules during that period. (A handful of groups have had their status revoked for failing to file financial statements for three consecutive years.)

Most cases do not even reach the IRS committee created to examine them. Between September 2017 and March 2019, the committee didn’t receive a single complaint to review according to one former and one current IRS employee who worked closely with the committee, even as at least 2,000 warranted its consideration. (The IRS disputes this.) The standards are almost as permissive when organizations apply for C4 status in the first place. In 2017, for example, the IRS rejected only three out of 1,487 applications.

The IRS’ abdication of oversight stems from a trio of causes. It started with a surge in the number of politically oriented C4s. That was exacerbated by the IRS’ almost comically cumbersome process for examining C4s accused of breaching political limits; the process requires a half-dozen layers of approvals and referrals merely to start an investigation. That is abetted by years of IRS staff attrition and loss of expertise that was then compounded by steady budget reductions by Congress starting in 2010. The division that oversees nonprofits, known as the “exempt organization” section, shrank from 942 staffers in 2010 to 585 in 2018, according to the IRS.

On top of that, the 2013 scandal in which the IRS was accused of targeting conservative nonprofits left the division seared by the vilification of the conservative politicians, media and the public, and by the resignation of Lois Lerner, who headed the division. Some IRS auditors say they were paralyzed. “I was scared of being pilloried, dragged to the Hill to testify, getting caught up in lawsuits, having to sink thousands of dollars in attorneys bills that I couldn’t afford, and having threats made against me or my family,” said one employee who worked in Lerner’s division at the time. “I locked down my Facebook page. I deleted all personal Twitter posts. I stopped telling people where I worked. I tried to become invisible.”

The IRS press office offered written responses to some of the questions submitted in writing by ProPublica. “The IRS administers the tax laws as enacted by Congress and maintains an active enforcement presence to promote equal application of the law to all taxpayers,” the statement noted four times, in response to questions about the adequacy of the agency’s enforcement and its resources.

The IRS is aware of the problems, but its attempts to address them have gone nowhere. A 2013 report by the IRS inspector general recommended changes for the agency. That included adopting a new, clear definition of what constitutes an organization’s “primary activity.” The IRS did that — only to have Congress shoot it down.

With the IRS ceding its oversight role, state authorities need to step in, said Jim Sheehan, chief of the charities bureau at the New York Attorney General’s Office, at an event on exempt organizations in February. Speaking broadly about what he described as the IRS’ failure to oversee political nonprofits, Sheehan said, “It’s the Wild West out there.”

The U.S. tax code has long offered nonprofits options for engaging in politics, each identified by the provision that governs it in the code. Each has trade-offs. For example, 501(c)(3) entities are tax exempt and allowed to lobby on a limited basis — but they’re barred from spending any money on political candidates. So-called 527s can spend all they want on elections — but they have to reveal their donors.

The C4s enjoy a lot of wiggle room. In that category, IRS regulations dictate that an organization that seeks tax-exempt status “must not be organized for profit and must be operated exclusively to promote social welfare. The regulations state that such an organization “may engage in some political activities, so long as that is not its primary activity.”

But how does one define an organization’s “primary activity”? For decades, the point was largely moot. Big funders used other means to funnel money to campaigns. Then came a series of Supreme Court rulings, the best known of which was the Citizens United decision in 2010, that loosened restrictions on political contributions. In that case, the court concluded that, like people, corporations and unions could spend unlimited funds for elections.

The Citizens United decision was followed by a surge in the formation of politically focused organizations seeking IRS approval as C4s. In 2012, at least $250 million passed through such groups and into efforts to elect candidates, an 80-fold increase from eight years prior.

That boom occurred at the same time that Congress began chipping away at the IRS budget. The combination left Lerner’s exempt organization unit overwhelmed. “My level of confidence that we are equipped to do this work continues to be shaken,” she wrote in an email in early 2013. “I don’t even know what to recommend to make this better.”

A handful of IRS employees in Lerner’s division had decided to improvise their own shortcut. If a group had a name that sounded political — for example, it had the words “Tea Party” in its name — they flagged it for extra attention.

Reporters eventually got wind of the tactic. Congressional interest followed and then a full-blown furor erupted in May 2013, when the IRS inspector general confirmed that IRS agents directed added scrutiny at groups with conservative-sounding words in the name.

The House convened hearings. Some Republican representatives claimed that Lerner was spearheading a partisan assault against conservative groups. “This is the most corrupt and deceitful IRS in history,” Rep. Kevin Brady, R-Texas, said in one hearing. Lerner declined to testify, citing her Fifth Amendment protections, and resigned.

By the time the tumult abated, few people noticed that the inspector general had submitted another report. This one concluded that IRS staff had also used keywords such as “progressive” to target liberal organizations for further scrutiny.

Before determining that the IRS exempt organization division had displayed no anti-conservative bias, the inspector general had proposed fixing the way it scrutinizes nonprofits. “We believe [the targeting] could be due to the lack of specific guidance on how to determine the ‘primary activity’” of a social welfare nonprofit, the report stated.

The IRS responded by advocating a restrictive approach: C4s should be barred from any campaign-related activity. Those guidelines, released in late 2013, prompted 150,000 comments, the most public feedback in IRS history. Several Republican members of Congress circulated bills to block such a change.

In the wake of that opposition, the IRS backed away from its categorical approach and instead proposed a percentage-based definition of “primary activity.” Then-Commissioner Koskinen and his team held a series of meetings and came up with a working draft. “After a lot of discussion and review, the consensus was that social welfare nonprofits’ political activity had to be less than 50 percent for them to qualify,” Koskinen said in an interview with ProPublica.

Koskinen argued for this approach in one-on-one meetings with Democratic and Republican leaders. “I thought it was important for people on the Hill to realize that it wasn’t political,” he said, “but to make regulations more enforceable from the standpoint of the IRS.”

Ultimately, Congress disagreed. In December 2015, 17 lines were inserted into an 888-page appropriations bill: “None of the funds made available in this or any other Act may be used ... to issue, revise, or finalize any regulation, revenue ruling, or other guidance … to determine whether an organization is operated exclusively for the promotion of social welfare.”

The House leadership, under then-Speaker Paul Ryan, inserted the ban in the final rounds of the bill’s negotiations, according to six people familiar with the rider. (Ryan did not respond to a request for comment.) Some of the language was borrowed from the previous Republican bills to restrain the IRS. And earlier in 2015, Ryan and then-Rep. Peter Roskam introduced the “Stop Targeting of Political Beliefs by the IRS Act of 2015.”

Koskinen told ProPublica he was surprised and disappointed. “The goal wasn’t to hamper anybody, but to help,” he said. “Leaving the situation murky is not doing any nonprofits any favors, and in fact is leaving more room for IRS employees to use their discretion and judgment.”

Since 2015, the lines have been carried over in each new appropriations bill. They remain in effect today.

Roger Vera was where congressional obstruction, the surge in C4s and the IRS’ Rube Goldberg oversight system all collided. As the referral manager for the exempt organizations division between 2013 and 2017, Vera ran the process through which citizens, IRS agents and others complained about groups they claimed had violated the tax code. (In IRS jargon, the complaints are called “referrals.”)

The IRS didn’t make it easy for him. It had adopted a convoluted system to handle those complaints after the increase in new applications that followed the Citizens United decision. It began with six steps: Complaints proceeded from a classifying agent, then to Vera, then to a research committee, then to one of three oversight committees, then back to Vera and then to a field agent. That was the process just to launch an investigation.

Each step was supposed to be documented in detail to demonstrate that politics had not infected the decision-making. There were more stages after that, of course, if the investigation revealed signs of a violation.

Between the high volume of complaints and the unwieldy process, Vera was overwhelmed. It was like “being in the middle of a hurricane,” he said. “You looked at 100% of the cases and researched 100% of them, but then you didn’t have time to do anything.” (Vera said he spoke to ProPublica without IRS approval because of the importance of transparency.)

The review process was so cumbersome, Vera said, that the three-year time limit for acting on each C4 complaint frequently expired before the IRS could take any action. “They made the system so complicated because they didn’t want the inspector general to come in and say, ‘Hey, you only looked at two or three cases and they’re all a certain political group,’” Vera said. Every complaint filed between 2010 and 2014 bogged down before field agents could begin investigating a C4 group, according to an investigation by the Senate Finance Committee in 2015.

The reports and reviews of Vera’s division — by the inspector general, by the Senate, by the Government Accountability Office — continued to mount. The scrutiny only seemed to make things worse. The division responded with periodic reorganizations, which kept staff off balance. The division also implemented a series of changes to the review process, such as shifting from rolling 12-month terms for review board members to fixed 24-month terms. It trimmed its pre-investigation process from six steps to five. The division also stopped accepting volunteers for the review board role and instead randomly assigned employees, who were already holding down full-time IRS jobs and received no extra compensation for serving on the board. In theory, the move away from volunteers would reduce the likelihood of politically motivated employees gaining seats. But compelling staffers to spend extra hours tackling complex cases where the tax code left significant latitude was not a formula for maximum efficiency.

The result was a continuing void in revoking the tax-exempt status of C4s. Between July 2015 and August 2016, the division received 6,539 complaints, according to an inspector general report. The report concluded that about 1,000 of them raised questions of rule violations relating to politics that should’ve been addressed by the special review committee. But Vera said he sent the committee only 19 cases — including both C4s and C3s each of them involving an organization prominent enough to draw significant media attention. The review committee forwarded 10 of those for investigation; as of early last year, half of those were being investigated and the other half were awaiting action. (The IRS statement noted that the agency “disagreed” with the inspector general’s “conclusion that allegations of political campaign intervention or excessive lobbying were not forwarded to the [review committee] for review as requested” and asserted that “some referrals may not contain all the elements required for the IRS to proceed.”)

Vera agreed with the inspector general’s view that there were more than 10 potential violators during that period. But between the vague language of the tax code and the agonizing review process, he had grown increasingly fatalistic. Even on the rare occasions when the review of a C4 made it through the pipeline and a field agent recommended revoking the organization’s tax-exempt status, Vera said, the IRS chief counsel would oppose the step on the grounds that the decision would likely be overturned in a court of law.

The situation has not improved since Vera shifted to another unit in 2017. The current review board, which began its two-year term in September 2017, had yet to receive any referrals as of March — despite at least 2,000 warranting the board’s expertise during that period — according to one former and one current IRS employee who worked closely with the review committee. (The IRS statement asserted that the committee did receive referrals, but “the data is not publicly available” and that reviews “are pending due to retirements on the committee.”)

Officials say they see reason for a few scintillas of optimism: The exempt organization unit is adding new staff. Margaret Von Lienen, who took over Lois Lerner’s post, announced in the fall of 2018 that the division hired 70 revenue agents and compliance officers, restoring its forces from a post-scandal low of 585 to 655, with plans to bring on an additional 70 in 2019. But even if the division hires those new employees, it will remain 200 employees below the count at the beginning of the decade.

“We’ve experienced so much attrition over the last few years that it’s a matter of having enough people to do the work,” Von Lienen said at a panel discussion in the closing weeks of 2018. In the short term, she said, the time required to train the new staff will slow the rate of review for C4 complaints. “We can probably expect in 2019 we’re going to do fewer exams,” she said. The division’s priority is to “stay on top of our application inventory, and probably the exam side of the house is going to suffer for that.”

While the IRS continues to try to dig out of its hole, made even deeper by the government shutdown this year, experts say new permutations of dark money are emerging. As Anna Massoglia, a researcher at the Center for Responsive Politics, put it, “There are new loopholes being exploited every day.”

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